Professional Documents
Culture Documents
Partnerships:
Termination
and
Liquidation
Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-
Why Terminate/Liquidate?
Retirement
Death
Personality disputes between
partners
Changed business environment
Other opportunities
Low profits
Bankruptcy (either the business or a
partner)
Required Steps
1. Sell non-cash assets
2. Allocate related gains/losses to the
capital accounts
Based on profit and loss ratio
Example:
Cash
$12,0
00
Other Assets
48,00
0
Liabilities
$17,0
00
J, Capital
21,00
0
K, Capital
6,000
16,00
a 2:1:1 ratio.
L, Capital
The partners share income in
If the others assets are sold0for
$64,000, record the sale, and$60,0
the payment
of creditors
and
Total
Liabilities
& partners.
$60,0
Total Assets
00
Capital
Journal Entry: Sell Other Assets
(1&2) and Allocate Gain on Sale.
00
$76,0
00
Liabilities
$17,0
00
J, Capital
29,00
0
K, Capital
10,00
0
20,00
The partners share income in a 2:1:1 ratio.
If
the
others
assets
are
sold
L, Capital
0 for
$64,000, record the sale, and the payment of creditors and partners.
$76,0
Total Liabilities &
$76,0
Total
Assets Entry:00Pay Creditors
Capital
00
(3&4 Journal
) and Partners:
Reports
Beginning balance
Sold other assets
Updated balances
Paid Liabilities
Updated balances
Distributed
remaining cash
Closing Balance
JKL Partnership
Statement of Partnership Liquidation
Other
Liabilitie
J,
Cash
Assets
s
Capital
12,000
48,000
17,000
21,000
64,000
(48,000)
8,000
76,000
0
17,000
29,000
(17,000)
(17,000)
59,000
0
0
29,000
K,
Capital
6,000
4,000
10,000
10,000
L,
Capital
16,000
4,000
20,000
20,000
(59,000)
0
(10,000)
0
(20,000)
0
(29,000)
0
Liabilities + Equity
$10,000
Liabiliti
es
$20,00
0
8,000
Loan Payable - X
6,000
100,000
Loan Payable - Y
4,000
X,
Capital
41,000
Y,
Capitalfrom/to the partners
10,000
Because receivables and payables
exist, Step 1 is to combine the
Z, receivables and payables
with the partners Capital
capital accounts:
37,000
Total
Assets
$118,00
0
$118,
000
8,000
8,00
0
Loan Receivable - Z
Loan Payable - X
X, Capital
Loan PayableCash
-Y
Beg. Bal.
10,000
Combine Rec/Pay
Y, Capital
Updated Bal
6,000
6,00
0
XYZ Partnership
Statement of Partnership Liquidation
Loan
Other
Loan
Loan
Rec Z Assets Liabilities4,000
Pay - X Pay - Y
8,000
6,000
4,000
100,000
20,000
4,00
0
X,
Capital
41,000
Y,
Capital
10,000
Z,
Capital
37,000
Ratio
Beg. Bal.
Combine
Rec/Pay
Updated Bal
Cash
10,000
XYZ Partnership
Statement of Partnership Liquidation
Loan
Other
Loan
Loan
Rec Z
Assets
Liab
Pay - X
Pay - Y
8,000
6,000
4,000
100,000
20,000
5
X,
Capital
41,000
3
Y,
Capital
10,000
2
Z,
Capital
37,000
The partners share income in a 5:3:2 ratio. If the others assets are sold for
$30,000 what is the journal entry?
XYZ Partnership
Statement of Partnership Liquidation
Ratio
Beg. Bal.
Combine
Rec/Pay
Updated Bal
Cash
10,000
Loan
Rec Z
8,000
Other
Assets
100,000
Liab
20,000
Loan
Pay - X
6,000
Loan
Pay - Y
4,000
5
X,
Capital
41,000
3
Y,
Capital
10,000
Sold other
assets
Updated Bal
2
Z,
Capital
37,000
XYZ Partnership
Statement of Partnership Liquidation
Ratio
Beg. Bal.
Combine
Rec/Pay
Updated Bal
Cash
10,000
Loan
Rec Z
8,000
Other
Assets
100,000
Liab
20,000
Loan
Pay - X
6,000
Loan
Pay - Y
4,000
5
X,
Capital
41,000
Sold other
assets
Updated Bal
3
Y,
Capital
10,000
2
Z,
Capital
37,000
Ratio
Beg. Bal.
Combine Rec/Pay
Cash
10,000
XYZ Partnership
Statement of Partnership Liquidation
Loan
Other
Loan
Loan
Rec Z
Assets
Liab
Pay - X
Pay - Y
8,000
100,000
20,000
6,000
4,000
5
X,
Capital
41,000
Updated Bal
Sold other assets
Updated Bal
Insolvent Partner
Updated
balances
3
Y,
Capital
10,000
2
Z,
Capital
37,000
1st:
nd
rd
partnership creditors
2nd
3rd
Installment Liquidations
Preliminary Distributions
Predistribution Plan
Interim Distributions
The process of liquidation can last over
months, even years.
Partners may experience deficit balances
during the liquidation period.
Partners may want cash distributions
prior to the completion of the liquidation.
Accountants distribute statements at each
important juncture of the process.
Example
ABC Partnership
Cash
Receivables
Inventory
$
3,000
Liabilities
$
30,000
30,000
A, Capital
4:
116,000
47,000
B, Capital
4:
120,000
Cash
Assets
38,000
267,00
0
Liabilit
A,
B,
C,
ies
Capital Capital Capital
30,000
112,20
0
114,20
0
The creditors can be paid and a distribution of $4,000 cash may be made to
A & B without placing the partnership in jeopardy.
48,600
In-Class 01
Predistribution Plan
Continual production of proposed
schedules of liquidation could become
burdensome.
Create a plan at beginning showing how
future payments will be allocated.
Develop by simulating a series of losses,
each of which is just large enough to
eliminate, one at a time, all of the
partners claims to partnership property.
$17,000
Liabilities
$30,000
300,000
A, capital
(40%)
117,000
B, capital
(40%)
119,000
C, capital
Liquidation expenses are estimated to be $4,000. Prepare a predistribution schedule to
(20%)
51,000
guide the distribution of cash.
Capital
Partner
Balanc
e
P/L
Ratio
Can be
Absorbed
A
Since ___ can onlyB
absorb a loss of $_______, new capital balances are computed
assuming that the partnership has a $________ loss.
C
ABC - Step 1 Allocations
Balance
A,
Capital
B,
Capital
C,
Capital
117,00
0
119,00
0
51,000
2nd Step Determine the maximum loss that each remaining partner can
absorb, select smallest loss.
Maximum Loss
that
Capital
Partner
Balanc
e
P/L
Ratio
Can be
Absorbed
Since ___ can only absorb a loss of $_______. Net balances are computed
B that the partnership has a $_______ loss.
assuming
ABC - Step 2 Allocations
step 1 balances
assumed $30,000 loss
A,
Capital
B,
Capital
C,
Capital
Recipient
1st
34,000
Next
$ ______
Next
$_______
In-Class 02